As the old saying goes, “The only thing that is constant is change.”
This saying rings even more true as we stand on the cusp of a significant shift in international trade.
The Electronic Trade Documents Bill (ETDB) has today received Royal Assent, and is officially an act of law (now the Electronic Trade Documents Act), promising to transform the way international trade is conducted electronically.
Electronic Trade Documents Act: “The most important bill you have never heard of”
The bill, which was first introduced into parliament on 12 October 2022, allows businesses to use electronic trade documents instead of paper documents.
Now that the bill has become enacted, businesses can now exchange trade documents electronically, such as bills of lading, waybills, and insurance certificates. It can now be cited as the Electronic Trade Documents Act.
In a recent TFG video interview, Lord Holmes said, “[the bill] is incredibly succinct, it’s incredibly simple, and it’s an incredibly powerful bill because it will enable trade documents to be held and transacted in electronic format.”
Today, Lord Holmes told TFG, “I have called it the most important Bill you have never heard of and I believe it is the first Bill to demonstrate the power and huge potential of new technologies deployed in our common law context.
I have also called it the “Blockchain Bill” because the criteria set out in the Bill – ensuring that an electronic document is capable of being subject to exclusive control and that once transferred the previous holder should no longer be able to exercise control over the document – can be delivered through distributed ledger (or blockchain) technologies although it is quite right that no particular technology is set out on the face of the bill.
This is a small change in the law with the potential to make a colossal impact, unleashing innovation and investment in digital trade solutions and delivering significant economic and environmental benefits.
Currently it can take days to transfer documents of title – with digital trade documents that will melt into minutes.
This excellent, enabling piece of legislation maximises the opportunity we have when we combine our tradition of common law and our trading history alongside our thriving financial and technology sectors.
Being the first G7 country to pass this into law is a great collective achievement. It is also just the start– we must now take the lead in building the systems, getting the digital economy agreements in place and encourage the rest of the world to collaborate for the benefit of us all.
The Electronic Trade Documents Act has the potential to be absolutely transformative not just for the trade industry but ultimately for us all, for citizen and state alike.”
Experts herald this as a significant change, with potential ripple effects felt not just within the UK but throughout the global trade ecosystem.
The existing paper-based system, a relic of the pre-digital era, has long been a cumbersome hindrance to modernising international trade.
Enter the ETDA.
From Bill to Act: A small step for language, a giant leap for law
The bill was passed through Parliament relatively quickly, taking just over seven months from its introduction to Royal Assent. This was due in part to the fact that the bill had cross-party support.
The Electronic Trade Documents Bill was introduced in the House of Lords on 12 October 2022.
The bill had its first reading in the House of Lords on 15 November 2022 and its second reading on 6 December 2022.
The bill was sent to the House of Commons for its first reading on 10 January 2023.
The bill had its second reading in the House of Commons on 24 February 2023 and was referred to the Business, Energy and Industrial Strategy Committee for further scrutiny.
The committee published its report on the bill on 20 April 2023.
The bill had its committee stage in the House of Commons on 10 May 2023, its report stage on 6 June 2023, and its third reading on 12 July 2023, and received Royal Assent, today, 20 July 2023.
Sean Edwards, Chairman of ITFA said, “We finally have Royal Assent to the Electronic Trade Documents Bill and the face of international, not just English, trade documentation has changed forever. I was honoured to give evidence to their Lordships during the legislative process.
I’ll permit myself just one short minute of emotion before we continue the onward march to creating a fully digital trade ecosystem. ITFA members have already made a flying start. One small step for (an English)man, one big step for all trading nations.”
The bill is not a requirement for businesses to use electronic trade documents. Businesses can still choose to use paper documents if they prefer. However, the bill is expected to encourage businesses to adopt electronic trade documents, as they offer a number of advantages.
The Electronic Trade Documents Act is a significant piece of legislation that is expected to have a positive impact on international trade. The bill will make international trade more efficient, secure, and cost-effective.
Sarah Green, Law Commissioner for Commercial and Common Law at Law Commission of England and Wales said, “This Act is a dramatic and significant change to the law of England and Wales. It allows electronic documents to be “possessed” – something that has not previously been possible as a matter of law. The possession of documents is crucial in commercial terms, which is why this Act was needed in order to make the full digitalisation of trade a reality.
Under the Act, such documents have to be held on a reliable system, so that their authenticity, singularity and integrity can be verified.
Essentially, the Electronic Trade Documents Act 2023 allows those electronic trade documents that can function like paper to be treated like paper: a small step for language, a giant leap for law.”
The Electronic Trade Documents Act (ETDA) consists of seven key clauses, each with its unique contribution to the digital transformation of trade.
1. Defining Paper Trade Documents: The first clause provides a clear definition of what constitutes a “paper trade document”. It outlines the criteria that a document must meet to qualify as such, and provides a non-exhaustive list of commonly used trade documents. This clause sets the stage for the types of documents that the ETDA will cover.
2. Defining Electronic Trade Documents: The second clause introduces the concept of an “electronic trade document”. It sets out the criteria that a document must meet to qualify as an electronic trade document, thereby establishing a framework for digital possession under the ETDA.
3. Possession and Endorsement of Electronic Trade Documents: Clause three equates the legal status of electronic trade documents with their paper counterparts. It ensures that actions taken in relation to electronic trade documents have the same legal effect as those taken in relation to paper trade documents.
4. Change of Medium or Form: The fourth clause provides for the conversion of paper trade documents into electronic ones and vice versa, facilitating a smooth transition between formats.
5. Opt-out Provision: The fifth clause introduces an “opt-out” provision. If applicable, this means that the provisions of clauses three and four will not apply to the relevant electronic trade document.
6. Consequential Amendments: The sixth clause outlines amendments to the Bills of Exchange Act 1882 and repeals certain provisions of the Carriage of Goods by Sea Act 1992, ensuring the ETDA aligns with existing legislation.
7. Territorial Extent, Commencement Date, and Short Title: The final clause outlines the territorial extent of the ETDA, its commencement date, and its short title.
In essence, the ETDA is a significant step towards the digitalisation of trade, providing a legal framework that recognises and facilitates the use of electronic trade documents.
The Electronic Trade Documents Act (ETDA) addresses a significant legal hurdle in the digitalisation of international trade: the issue of possession.
Traditionally, the law has required trade documents to be tangible to be “possessable”, which has limited the use of electronic forms of trade documentation.
Currently, some workarounds have existed in the market to ‘imitate’ what the ETDA hopes to achieve, such as Bolero and essDOCS, as well as the ITFA Digital Negotiable Instruments Initiative, and the Electronic Payment Undertaking (EPU).
The ETDA, however, extends the concept of possession to electronic trade documents, allowing them to be used in the same way as their paper equivalents to enforce the right to delivery of goods or payments of sums of money.
This is achieved by providing that electronic transactions and documents can be functionally equivalent to paper versions, allowing electronic trade documents to benefit from the existing law on possession.
Geoffrey Wynne, head of Sullivan’s Trade & Export Finance Group and the firm’s London office, said, “The Electronic Trade Documents Act is as brief and as clear as it is possible to envisage. It can now become a focal point in the UK, leading the way to the digitalisation of trade documents. Take-up should be straightforward, but may take time to be fully adopted by all parties.
It will help to bring the trade and the trade finance industry up to date by speeding up trade transactions and removing the need for paper documents in many cases. It can also address transferability issues by permitting the legal concept of ‘possession’ to apply to an electronic document.
This new law removes the physical barriers to the creation and exchange of the documents of trade and trade finance, and will, I have no doubt, deliver a significant uptick in the volume of trade that is financed, globally, in the coming years by both banks and non-bank financial institutions. It will also broaden out the appeal of trade finance assets as viable assets to finance.”
This approach avoids the need for separate legal regimes or any difference in legal treatment of a paper and an electronic trade document.
The ETDA also addresses the issue of reliability in the use of electronic trade documents.
A key requirement for an electronic trade document under the ETDA is that it should have been issued using a reliable system.
While the ETDA does not outline specific requirements for an electronic trade document system, it does provide a non-exhaustive list of factors that courts may take into account when assessing the reliability of a particular system.
This approach allows for the development of industry standards for such systems, with several emerging industry standards already being pointed out, including the Digital Container Shipping Association (DCSA)’s standards for an e-bill of lading, the ICC’s Digital Standards Initiative (DSI), and the Future International Trade (“FIT”) Alliance.
These standards aim to create a single universal set of rules for the digitalisation of international trade, ensuring the reliability of electronic trade document systems.
Saving 6 days, 11 hours, and 50 minutes
Though trade insiders are certainly the most excited by the passing of the ETDA, it can’t be denied that the bill will have far-reaching implications for everyone, whether they know it or not.
By sanctioning the use of electronic documents in trade, the UK government is set to usher in a new era of streamlined efficiency and improved transparency for international trade.
Paper documentation is notoriously slow, and the process hasn’t changed much since the original rules, “Bills of Exchange Act 1882” and the “Carriage of Goods by Sea Act of 1992”.
But now, the ETDA will allow these trade documents to be digitalised, which will cut down the processing time for all parties involved. The UK government said that the switch to digital documents can reduce the processing time from 7 days to 10 minutes.
Who doesn’t appreciate gaining 6 days, 11 hours, and 50 minutes by simply using electronic documents?
This is particularly significant for SMEs, as they often struggle to navigate the maze of regulations, a situation exacerbated by the slow and often error-prone paper-based system.
Nick Davies, Director of the ICC United Kingdom ICC United Kingdom Centre for Digital Trade & Innovation (C4DTI) said, “Removing legal barriers to digitalise trade is a major step forward in ensuring world trade is fit for purpose for the 21st century.
The big challenge ahead is to now implement the legislative framework and ensure everyone benefits, especially SMEs.
The focus of the UK Centre for Digital Trade and Innovation is to ensure the provisions of the law are fully enabled and to now call on all global businesses to help us capture the benefits.”
But time won’t be the only thing being saved.
The Law Commission said, “The International Chamber of Commerce has estimated that digitalising trade documents could generate £25 billion in new economic growth by 2024, and free up £224 billion in efficiency savings”
Andre Casterman, Managing Director, Casterman Advisory and Board Member, Fintech Committee, ITFA said, “The ETDA provides a unique opportunity for alternative lenders, and for banks, to fund SMEs on the basis of English common law.
Lenders will also benefit from institutional liquidity available from capital markets through automated repackaging of digital negotiable instruments.
By combining ITFA’s DNI Initiative with our capital markets-focused TFD Initiative, we have designed a way for lenders to digitise the end-to-end origination and distribution processes.”
Beyond the UK: MLETR Adoption in the G7 and Emerging Markets
While the UK has been a frontrunner in the adoption of digital trade laws, it’s not the only country making strides in this area.
The UNCITRAL Model Law on Electronic Transferable Records (MLETR) is gaining traction globally, with several G7 countries and emerging markets exploring its adoption.
MLETR aims to bridge the gap in trade digitisation by addressing transferable documents and instruments, such as bills of lading, warehouse receipts, and promissory notes.
These documents, historically reliant on paper-based processes, require legal adaptation to ensure equivalence with electronic alternatives. MLETR provides these needed adaptations.
In the United States and Germany, legislation enabling the use of most transferable documents is already in place.
However, some specific documents, like bills of lading, still require further application. Japan has a study group dedicated to exploring the application of MLETR to bills of lading and already possesses laws for electronic promissory notes.
Meanwhile, France is anticipated to release a white paper addressing both the legal and business aspects of MLETR.
Emerging markets are also showing interest in MLETR.
Luca Castellani, legal officer at the Secretariat of the United Nations Commission on International Trade Law (UNCITRAL) said in a video interview with TFG, “The adoption of the Electronic Trade Documents Act represents a milestone in trade digitisation. On the legislative side, it may encourage other countries to adopt legislation based on the UNCITRAL Model Law on Electronic Transferable Records to ensure legal recognition of electronic trade documents issued in the United Kingdom and elsewhere abroad.
On the commercial side, it opens the door to innovation by enabling the delivery of more trade-related information, of better quality, faster, and at a lower cost. The global banking and logistics community will follow closely forthcoming business developments in the United Kingdom.”
3 million trees say thank you
The environmental implications of this shift are also worth highlighting. The move away from paper documentation contributes to the broader, increasingly pressing global initiative to reduce waste and drive sustainability.
The pervasive use of paper creates inefficiencies in the process and leaves a negative environmental footprint. The UK government estimated that the trade industry uses 28.5 billion paper documents a year.
In other terms, that saves 2,850,000 trees per year.
The same report noted that the UK emitted roughly 2.5 million tonnes of carbon dioxide in 2018 simply from paper and printing in international trade.
The starting gun has sounded, now the real race starts
The passing of the ETDA is a major step in modernising international trade, but it is not the final piece.
Like all significant shifts, it brings additional challenges.
Cybersecurity, data privacy, and technical compatibility issues loom large on the horizon.
The task for the British government, and indeed governments worldwide, will be to craft a legal and regulatory framework that can accommodate these electronic changes while robustly protecting stakeholders’ interests.
Internationally, Britain’s move is likely to encourage similar shifts elsewhere. Already, there is talk of comparable bills in other jurisdictions.
Trade, by its very nature, is an international affair; as such, Britain’s actions may act as a catalyst, prompting a domino effect in other countries.
Chris Southworth, Secretary General, ICC United Kingdom said, “The Electronic Trade Documents Act presents a unique model for Commonwealth nations to accelerate the removal of legal barriers to digitalise trade and realise a $1.1 trillion trade and economic growth opportunity.
The Commonwealth share the same legal framework, in many cases word for word, so there are few other global networks that can modernise trade as quickly as this grouping of countries, especially given more Commonwealth states have already done so than any other global network.
This is perfect timing on the back of Commonwealth trade ministers agreeing on a Legal Reform and Digitalisation working group to drive this agenda forward in June this year.”
The Electronic Trade Documents Act is a signal of the shifting tides. A move towards a more efficient, more inclusive, and greener form of trade that reflects the digital age in which we live.
It is, in a sense, a new dawn for international trade, promising benefits that extend far beyond Britain’s shores.
But amidst this optimism, there must be caution. The success of this transformation will hinge on the ability of governments and businesses alike to navigate the challenges that accompany such a shift.
The journey ahead may not be smooth, but if handled well, the reward – a revolutionised international trade landscape – will be well worth the ride.